CoreWeave has been a hot-button company since even before it went public in March of last year. It pioneered the "neocloud" business model -- a cycle of debt, capital expenditures and hypergrowth. In the process, it has gone from a company with $16 million in annual sales in 2022 to one expected to report $3.5 billion in quarterly revenue on Tuesday afternoon.
For those who crave excitement, CoreWeave stock has not disappointed. Since it went public, its average absolute daily percentage change has exceeded 5%. Its average absolute share-price change following earnings has been almost 15%. It's traded as high as $187 and as low as $33.52.
CoreWeave is a highly leveraged bet on AI, and it's been a battleground stock since the beginning, even during its initial public offering road show when the listing price kept changing.
The third quarter comes at a crucial moment for CoreWeave, which has seen its share price nearly halved since October 6. Prices on its debt have also plummeted. Its EUR2 billion senior-note offering due in 2032 is trading at about 75% of face value, and its convertible debt is even lower.
CoreWeave's growth begins with its close relationship with Nvidia, which is a 9% shareholder, a customer, and the neocloud's most important supplier. CoreWeave's business is renting out Nvidia servers in the cloud, and the access it's had to Nvidia gear is what catapulted it from obscurity.
CoreWeave has leveraged that access into large cloud contracts with heavy-hitters like Microsoft and Meta Platforms, and the once-tiny company reported approximately $104 billion in revenue backlog at the end of June, plus more than $25 billion in new customer commitments early in the third quarter.
To execute on its end of these contracts, CoreWeave has raised capital in successive rounds of financing that have included debt, convertibles and equity, using the proceeds to buy Nvidia equipment to fill leased data centers. With one notable exception a year ago, CoreWeave has been able to deliver capacity on time, which then converts backlog to revenue at increasing rates every quarter.
But investor appetite for neocloud debt seems to have weakened. CoreWeave had seen its cost of capital inch down over time, but this new environment may reverse that trend or even freeze it out entirely. This would be disastrous because access to financing is foundational to the business model. If CoreWeave can't borrow money, its ability to deliver additional cloud capacity could be impaired, and it could breach contracts.
CoreWeave's sales are expected to climb by 160% in the third quarter, and even with mounting depreciation expenses, analysts are projecting a small adjusted operating profit of $240 million. But interest expenses, which the company pegged at around $900 million, would more than offset that amount. Lowering its cost of capital and consequently interest expenses is the company's key financial lever, and that may be slipping from its grasp.
CoreWeave will have to use the opportunity of the earnings call to make the case that it can still access capital at reasonable rates, and keep the flywheel spinning.
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